Robert Farrington is the founder and editor of The College Investor, a personal finance site dedicated to young adult and college student finances
Last Updated on August 6, 2015
There are a lot of misconceptions about student loans. A lot of people hate them, a lot of people need them. The majority of people don’t understand every facet about them – and that can lead to trouble.
Given that there is over $1 trillion in student loan debt, and that the average graduate has almost $30,000 in student loans, borrowers need to understand these facts to make sure they are making the best decisions possible.
1. The Collateral For Your Student Loan Debt Is Your Future Earnings
When you buy a car and get a car loan, the collateral for the car loan is the value of the car. If you don’t make your monthly payments, the bank simply repossesses your car. The same is true for a house and a mortgage. You don’t pay your mortgage, the bank forecloses on your house.
So when you take on student loans, what do you think the collateral is? Just goodwill? No, the collateral on your student loans in your ability to earn money in the future. If you fail to pay back your loans, the lender (either the government or bank) can garnish your wages, garnish your Social Security, and even offset and take your tax refund.
This is the key reason why, for the most part, student loans aren’t dischargeable in bankruptcy. Bankruptcy helps liquidate your assets to repay your debt and cancels the rest if you really can’y repay it. But with student loans, as long as you have the ability to earn, you have the ability to pay something. It’s also the key reason why there is student loan forgiveness for being disabled – you simply can’t earn any more money to repay the loans.
2. You Can Refinance Federal Student Loans
There is a big misconception about student loan refinancing. Many borrowers don’t think they can refinance their student loans to lower their payments, specifically with private student loans. However, since 2009, the government has allowed borrowers to refinance their Federal student loans… into private student loans.
Now, this doesn’t make sense for a lot of borrowers. If you rely on your Federal student loans for income-based repayment programs, or some type of forgiveness program, then you shouldn’t refinance your loans this way.
However, if you are on the Standard Repayment Plan and are looking for options to lower your payment and interest, the refinancing into a lower interest rate private student loan could make a lot of sense. I recommend using Credible, a marketplace for student loans. Like Kayak or Expedia except for student loan refinancing, Credible helps your receive offers from multiple lenders after filling out a single form.
3. Parents Who Take On Loans For Their Kids Owe The Debt
One of the most commonly asked questions I receive about student loan debt goes like this: “I took out $30,000 in student loans to pay for my daughter’s college. Now I’m 55 and nearing retirement, and my daughter can’t make payments because she doesn’t have a job yet. What are my options?”
When getting ready to finance college, a lot of parents are under the misconception that if they take out student loans, their children have to make the payments on them. This is incorrect.
If a parent takes out a loan, the parent is responsible for the loan – not the student. If the student can’t pay, the parents are on the hook for the debt. Want to switch repayment plans? It might not be possible.
Parents should never take out student loans for their children. Going back to Fact #1 – the student loan’s collateral is earnings. If the parent takes out the loan, the collateral is the parent’s earnings now, not the student.
4. If You Don’t Graduate College, You Still Have To Pay Back Your Loans
Too many students go to college to “find themselves”. This is not a good idea. College is expensive. Life changes. In a lot of these stories, the student ends up leaving college to pursue a dream, with no degree and a bunch of student loan debt.
The fact is, whether you graduate or not, you’re still on the line for your student loan debt. Just because you don’t finish doesn’t get you out of repaying what you’ve already spend on school. I was recently talking to a woman named Sara, who went to college for a year and a half before deciding the college wasn’t for her. She accrued $45,000 in debt from that year and a half. She really wanted to become a dental hygienist, which required another couple years of vocational school, at a cost of $20,000 per year. She was looking for a way out of the original debt – but it wasn’t happening.
Whatever your post-college plans are, you need to repay your debt. Vocational school can be a great option, but remember the total cost of school post-graduation. You still have to repay your student loans no matter what.
5. Cosigners On Student Loans Are Just As Responsible As The Student
Finally, when you cosign a loan, including a student loan, you are just as responsible as the borrower. Parent, grandparent, family member, friends – don’t cosign a student loan. If you really must, you need to cosign a student loan the right way.
When you cosign a student loan and the student can’t repay the debt – you must repay the debt. In a worst-case scenario, if you cosign a loan and the student dies, you might still have to repay the debt.
Even after graduation, and the student is making payments every month, it can be difficult to get a cosigner release. That means, you can still be on the hook for the entire duration of the loan. This can have an impact on your own credit score, and even prevent you from purchasing a car or house in some circumstances.
If you’re not in a position to personally take out a student loan, then you shouldn’t cosign one. It’s the same thing.
Bonus Fact: Where To Get Help
Fact: there are a lot of ways to get help with your student loans. There are free resources, like we offer here on our site: Student Loan Debt HQ. There are paid resources like our Ditch Your Student Loans program, where you can get expert help tailored to your personal student loan debt situation. And you can always call your lender or reach out to the Department of Education.
But be careful. There are companies out there that are prowling for student loan borrowers. I recently had a “victim” reach out to me – she had $9,000 in student loan debt and a company wanted her to pay $999 to get help with her student loans. That’s over 10% of the loan amount – if she had that money to spend it would have been better spend just paying down her student loans.
If you need help, it can make sense to pay for it. Just don’t pay too much and really know what you’re getting.
About Robert Farrington
Robert Farrington is the founder and editor of The College Investor, a personal finance site dedicated to young adult and college student financesLast Updated on August 6, 2015
There are a lot of misconceptions about student loans. A lot of people hate them, a lot of people need them. The majority of people don’t understand every facet about them – and that can lead to trouble.
Given that there is over $1 trillion in student loan debt, and that the average graduate has almost $30,000 in student loans, borrowers need to understand these facts to make sure they are making the best decisions possible.
1. The Collateral For Your Student Loan Debt Is Your Future Earnings
When you buy a car and get a car loan, the collateral for the car loan is the value of the car. If you don’t make your monthly payments, the bank simply repossesses your car. The same is true for a house and a mortgage. You don’t pay your mortgage, the bank forecloses on your house.So when you take on student loans, what do you think the collateral is? Just goodwill? No, the collateral on your student loans in your ability to earn money in the future. If you fail to pay back your loans, the lender (either the government or bank) can garnish your wages, garnish your Social Security, and even offset and take your tax refund.
This is the key reason why, for the most part, student loans aren’t dischargeable in bankruptcy. Bankruptcy helps liquidate your assets to repay your debt and cancels the rest if you really can’y repay it. But with student loans, as long as you have the ability to earn, you have the ability to pay something. It’s also the key reason why there is student loan forgiveness for being disabled – you simply can’t earn any more money to repay the loans.
2. You Can Refinance Federal Student Loans
There is a big misconception about student loan refinancing. Many borrowers don’t think they can refinance their student loans to lower their payments, specifically with private student loans. However, since 2009, the government has allowed borrowers to refinance their Federal student loans… into private student loans.Now, this doesn’t make sense for a lot of borrowers. If you rely on your Federal student loans for income-based repayment programs, or some type of forgiveness program, then you shouldn’t refinance your loans this way.
However, if you are on the Standard Repayment Plan and are looking for options to lower your payment and interest, the refinancing into a lower interest rate private student loan could make a lot of sense. I recommend using Credible, a marketplace for student loans. Like Kayak or Expedia except for student loan refinancing, Credible helps your receive offers from multiple lenders after filling out a single form.
3. Parents Who Take On Loans For Their Kids Owe The Debt
One of the most commonly asked questions I receive about student loan debt goes like this: “I took out $30,000 in student loans to pay for my daughter’s college. Now I’m 55 and nearing retirement, and my daughter can’t make payments because she doesn’t have a job yet. What are my options?”When getting ready to finance college, a lot of parents are under the misconception that if they take out student loans, their children have to make the payments on them. This is incorrect.
If a parent takes out a loan, the parent is responsible for the loan – not the student. If the student can’t pay, the parents are on the hook for the debt. Want to switch repayment plans? It might not be possible.
Parents should never take out student loans for their children. Going back to Fact #1 – the student loan’s collateral is earnings. If the parent takes out the loan, the collateral is the parent’s earnings now, not the student.
4. If You Don’t Graduate College, You Still Have To Pay Back Your Loans
Too many students go to college to “find themselves”. This is not a good idea. College is expensive. Life changes. In a lot of these stories, the student ends up leaving college to pursue a dream, with no degree and a bunch of student loan debt.The fact is, whether you graduate or not, you’re still on the line for your student loan debt. Just because you don’t finish doesn’t get you out of repaying what you’ve already spend on school. I was recently talking to a woman named Sara, who went to college for a year and a half before deciding the college wasn’t for her. She accrued $45,000 in debt from that year and a half. She really wanted to become a dental hygienist, which required another couple years of vocational school, at a cost of $20,000 per year. She was looking for a way out of the original debt – but it wasn’t happening.
Whatever your post-college plans are, you need to repay your debt. Vocational school can be a great option, but remember the total cost of school post-graduation. You still have to repay your student loans no matter what.
5. Cosigners On Student Loans Are Just As Responsible As The Student
Finally, when you cosign a loan, including a student loan, you are just as responsible as the borrower. Parent, grandparent, family member, friends – don’t cosign a student loan. If you really must, you need to cosign a student loan the right way.When you cosign a student loan and the student can’t repay the debt – you must repay the debt. In a worst-case scenario, if you cosign a loan and the student dies, you might still have to repay the debt.
Even after graduation, and the student is making payments every month, it can be difficult to get a cosigner release. That means, you can still be on the hook for the entire duration of the loan. This can have an impact on your own credit score, and even prevent you from purchasing a car or house in some circumstances.
If you’re not in a position to personally take out a student loan, then you shouldn’t cosign one. It’s the same thing.
Bonus Fact: Where To Get Help
Fact: there are a lot of ways to get help with your student loans. There are free resources, like we offer here on our site: Student Loan Debt HQ. There are paid resources like our Ditch Your Student Loans program, where you can get expert help tailored to your personal student loan debt situation. And you can always call your lender or reach out to the Department of Education.But be careful. There are companies out there that are prowling for student loan borrowers. I recently had a “victim” reach out to me – she had $9,000 in student loan debt and a company wanted her to pay $999 to get help with her student loans. That’s over 10% of the loan amount – if she had that money to spend it would have been better spend just paying down her student loans.
If you need help, it can make sense to pay for it. Just don’t pay too much and really know what you’re getting.
Filed Under: Student LoansTagged With: Student Loan Debt, Student Loan Myths, Student Loan Refinancing
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